Legal Commentary

In an earlier post, I criticized as "wrongheaded" the idea that what happens in the stock market is an appropriate metric for the severity of the financial crisis. A commenter suggests that if I'm so smart, I should write something about credit markets. To that effect, here's a quote from a Bloomberg article today (HT: Calculated Risk; all emphasis added):

The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 431 basis points to an all-time high of 6.88 percent today, the British Bankers' Association said. The euro interbank offered rate, or Euribor, for one-month loans jumped to a record 5.05 percent, the European Banking Federation said. The Libor-OIS spread, a gauge of the scarcity of cash, also increased to an all-time high.

``This is unheard of, the money markets should be the engine driving the financial system but they have broken down,'' said Kornelius Purps, a fixed-income strategist in Munich for UniCredit Markets and Investment Banking, a unit of Italy's largest lender.

What's happening here is that banks won't lend to each other. That might not bother you, but it should. The role of credit markets is to move money from savers, aka depositors, to firms that invest in the real economy (producing stuff that leads to jobs). If credit markets break down, that channel doesn't exist, and the end result will be a major slowdown on the real side of the economy.

Here's more:

Yields on overnight U.S. commercial paper jumped 171 basis points today to an eight-month high of 3.95 percent, according to data compiled by Bloomberg. Average rates on paper backed by assets such as credit cards and auto loans rose 229 basis points to 6.5 percent, the highest since 2001. Companies sell commercial paper to help pay for day-to-day expenses such as salaries and rent.

And more still:

``The money markets have completely broken down, with no trading taking place at all,'' said Christoph Rieger, a fixed- income strategist at Dresdner Kleinwort in Frankfurt. ``There is no market any more. Central banks are the only providers of cash to the market, no-one else is lending.''

I know some people oppose a bailout because it offends their ideological sensibilities, that government shouldn't get in the way of the well-functioning markets. Anyone holding that view should re-read the last sentence from Rieger: "Central banks are the only providers of cash to the market, no-one else is lending."

This is just one article, but it gives you a flavor.